America’s labor market is booming. Over the past six months, the economy added an average of 465,000 net jobs per month – recovering all the jobs lost during the pandemic, as of July – and the unemployment rate fell by three-tenths of a percentage point. At 3.5%, it is as low as it was in the tight labor market of early 2020.

Unfortunately, the workforce participation rate tells a different story. At 62.1%, it is 1.3 percentage points below its level in February 2020, the month before the pandemic began pummeling the US economy. Although the labor-force participation rate has recovered nearly two percentage points from its low in April 2020, it has been stagnant over the course of this year.

True, much of the decline is being driven by relatively older workers. Early retirements and the aging of the population have reduced the workforce participation rate for people over 55 to 38.7% –1.6 percentage points lower than its February 2020 level. Worse, economists at Goldman Sachs estimate that population aging could continue to reduce the participation rate by 0.2 percentage points per year.

Late effects of the pandemic

But unfavorable demographics do not explain the entire drop. People in their early twenties are 3% less likely to be in the workforce now than they were when the pandemic began. And for people in their «prime working years» – ages 25 to 54, when they are generally too old to be in school but too young to be retired – the rate is 0.7 percentage points lower than it was in February 2020.

Moreover, merely returning to pre-pandemic workforce participation rates sets the bar for success too low. Prior to the pandemic, average wages were growing at around 3% per year; but they have recently been growing substantially faster, at an annualized rate of around 5%. And in sectors such as leisure and hospitality, transportation and warehousing, and education and health services, the underlying rate of wage growth has tripled.

Higher and faster-growing wages should make employment more attractive, so it is reasonable to expect workforce participation rates – particularly for prime-age workers – to be higher than they were before the pandemic. So, why aren’t they? The pandemic could still be part of the reason. According to my calculations using data from the US Census Bureau, 7.3 million people say they are not working because they are caring for someone with COVID-19 symptoms; concerned about getting the disease; or laid off, furloughed, or subject to temporary workplace closures due to COVID-19.

Steady drop over time

Moreover, owing to various stimulus laws passed earlier in the pandemic, US households still have more than $2 trillion in excess savings on their balance sheets, which could be keeping some people on the sidelines. And because some childcare centers still have rather draconian rules that require children to quarantine after any COVID-19 exposure, some parents may be unable to get back to work.

But as the months continue to tick off the calendar, these explanations are becoming less persuasive, and the post-pandemic decline in workforce participation is starting to look more like part of a longer-term trend toward joblessness. In July 1952, around 97% of men between the ages of 25 and 54 were participating in the US workforce. Last month, that share had fallen to around 88%. The drop has been steady over time, with the participation rate recovering somewhat during expansions, but seldom returning to its previous peak.

Over most of this period, prime-age women have been increasing their participation in the workforce, which peaked at 77.3% in 2000 before falling back to 76.4% last month. This aligns with the trend for the overall participation rate, which peaked in the late 1990s and now sits more than two percentage points below its high mark.

A slow-burning catastophe

For my part, I had expected both headline employment and prime-age participation to recover fully from the pandemic. But if the participation rate doesn’t fully recover, this will indicate that the constellation of forces that has been pushing it down over the past several decades is even more powerful than I had previously thought.

The long-term increase in joblessness is one of the most important economic and social challenges facing the United States. Joblessness represents a serious potential headwind for economic growth and is well-known to be associated with higher rates of crime and other social ills. For many, paid employment is a source of dignity and fulfillment – a way to contribute to society and to earn success.

Ever-lower rates of workforce participation are a slow-burning catastrophe. Whether or not the share of adults participating in the workforce fully recovers from the pandemic, reversing the longer-term decline should be a top priority for policymakers in both political parties. So far, it hasn’t been. But with Republicans’ newfound rhetorical commitment to being a «working-class party,» and with much of President Joe Biden’s social-policy agenda still on the shelf, the table at least is set for this issue to be considered.

Will policymakers rise to the challenge? I wouldn’t bet on it. But for the sake of the country’s long-term economic outlook – and of the millions of additional Americans who could be contributing their talents and efforts through paid employment – I hope to be surprised.

Copyright: Project Syndicate.

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